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Stocks rose smartly last week, by more than 1.5% in a broad rally, despite soft gross domestic product news that caused shares to drop on Friday. First-quarter earnings reports came in, for the most part, as projected.

The Commerce Department said that real GDP had risen at a 2.5% annual clip in the first quarter. That was up from 0.4% in the fourth quarter, but weaker than the 3% consensus estimate.

The Dow Jones Industrial Average closed at 14,712.55, up 1.1%, or 165 points, on the week, while the S&P 500 added 27 points, or 1.7%, to end at 1582.24. Friday, the S&P fell 0.2%. The Nasdaq Composite index picked up 73 points and rose 2.3% last week, to 3,279.26.

With May nearly upon us, John Leo Manley, the chief equity strategist for Wells Fargo Funds, is already thinking of the summer and likens the market to a beach ball under water. "When you push it down, it just bobs up."

What's behind that bob? Monetary easing by central banks around the world in general, and the Federal Reserve's quantitative bond buying in particular, he says.

Investors must realize two things, Manley avers: "First, the Fed isn't going to stop soon, and secondly, no one is going to be able to say soon that the Fed's easing won't work." So the market goes up just when bears are able to push it down, as happened the previous week.

In a scenario in which the Fed keeps the pedal to the metal, Manley favors large-cap stocks over small-caps. More specifically, he adds that although he still likes the health-care sector, "it's beginning to look a little long in the tooth now" after a 19% rally this year. "I'd start to focus on large tech stocks more. They look cheap." (More on this below.)

This week, investors have a plethora of news to look forward to, including a Fed meeting topped off by April nonfarm payroll numbers. Given the surprise of the unsatisfying March payroll figures one month ago, notes Douglas Cote, chief market strategist at ING Investment Management, the market will look to see if that disappointing data was a one-time event.

Speaking of summer, the market is approaching its traditionally weak season. According to Robin Carpenter, who heads up research firm Carpenter Analytix, from 1972 through 2012, the S&P had an average price gain of 6.8% in the seven months from October through April. In the other five months, the S&P had a cumulative loss of 1.62%.

After the rip-roaring 11% start to 2013, that shouldn't stop investors from enjoying the summer, should it?

Johnson's gone, but Penney remains hated, with almost 40% of its shares sold short. The company has an enterprise value (net debt plus market capitalization) of $5.7 billion, with about $3 billion in debt and $930 million in cash. Property and plant on the balance sheet equal $5.3 billion, after $3.1 billion in depreciation. Penney's revenue fell 25% in 2012, to $13 billion, and Johnson was recently replaced by his predecessor, Myron Ullman.

Trying to predict the retailer's fortunes is a wild guess at best, so equity valuations for such a risky stock aren't useful. Shorts say liquidity issues could drop Penney to $10. But any evidence of stabilization—however, unlikely—could jump-start the shares.

The bonds might prove less risky, says James Roumell, president of his eponymously named investment-management firm in Chevy Chase, Md. He's been buying Penney bonds due 2020 with a coupon rate of 5.65%. They trade at about 83-84 cents on the dollar, he adds, providing an annualized yield to maturity of 8%-9%. The bonds are selling at "stressed levels, not distressed," he observes.

The rationale is that, in the worst case, Penney's assets can cover its debts, and that even if the retailer just muddles along, the bonds can rally close to par.

Yet investors disagree on the value of the company's real estate. Penney owns nine of its 27 distribution centers; 426 of its 1,102 stores, including 121 on land leases; its Plano, Texas, headquarters, and 240 acres around it. Investors we spoke with put the owned real estate at anywhere from $1.6 billion to $3 billion. One estimate, which included the value of long-term contracts on leased properties, had it near $8 billion.

Penney's woes make its stock a speculation, instead of an investment. The bonds seem a better bet.

Investors remain nervous about this bull market's longevity, and those wanting big blue chips have opted for stable defensive names like J&J, rather than cyclical technology giants like Cisco.

Even though the networking-equipment maker's earnings-per-share gains and free-cash-flow growth over the past 10 years have, on average, bettered J&J's, there's a bias to the defensives. The idea is that if things go belly-up, folks will stop purchasing routers before they stop buying aspirin.

While there's a logic to that, the wide valuation disparity seems much more a result of market style than differences in fundamental outlook. That should make a long-term investor think twice about adding J&J at this price and ignoring Cisco.

Both companies are dominant players in their industries and possess industry-leading financial strength, says Martin Leclerc, a money manager at Barrack Yard Advisors. Triple-A credit Johnson & Johnson has about $6 billion of net cash. Cisco is rated just A-plus, despite having net cash of some $30 billion, he notes. Their market values are $238 billion and $110 billion, respectively.

Though J&J's business is somewhat non-cyclical and thus perceived as less risky, the cyclical risk associated with Cisco, Leclerc says, is mitigated by its solid incumbent position in global information technology infrastructure, a strong balance sheet, and low valuation.

"It's when things are cheap that they seem riskiest," says the portfolio manager. Using this logic, Cisco is less risky than J&J. Indeed, if Cisco's net cash of $5.60 per share is subtracted from its stock price, the shares trade at about nine times earnings per share, less than half of J&J's multiple, though the technology outfit has a better track record.

When various one-time charges to earnings are added back to J&J's net profit line, the health-care giant shows little EPS growth over the past eight years.

J&J hiked its dividend 8% Thursday, but its payout ratio—the payout as a percent of earnings—is about 64%. At Cisco, which only recently began paying a dividend, the ratio is just 27%, so it would appear to have more room to boost its payout. Indeed, this month, it announced a 21% hike.

Leclerc says he bought Cisco for the first time recently and that J&J, which he's held a long time, is close to his $90 sell price.

J&J is winning the match so far, but when earnings fundamentals come back in style, as they usually do, they appear to favor Cisco.

Up 50%, IP Likely to Jump Still Higher

The good news is that
International PaperIP 0.5071545009961963%International Paper Co.U.S.: NYSEUSD55.49
0.280.5071545009961963%
/Date(1427835825426-0500)/
Volume (Delayed 15m)
:
2966600AFTER HOURSUSD55.14
-0.350000000000001-0.630744278248333%
Volume (Delayed 15m)
:
33152
P/E Ratio
42.46900352058778Market Cap
23345272130.2689
Dividend Yield
2.8834024148495225% Rev. per Employee
407190More quote details and news »IPinYour ValueYour ChangeShort position
shares are up more than 50% since we wrote bullishly about the paper-and-packaging company two years ago ("No Paper Tiger," May 2, 2011). Even better, investors can look forward to more gains, based on recent industry-wide price hikes and strong cash generation by Memphis-based IP.

In our story, Chip Dillon, formerly of Credit Suisse and now at Vertical Research Partners, made the case for the shares (ticker: IP) to hit $42 by May 2012, based on stronger demand, improved pricing, international growth, and margin expansion. While IP's $4.5 billion takeover of rival Temple-Inland delayed the gains a bit, the stock reached a high of $49.10 in early April from $30.48 at the time of our story. Dillon's current price target is $55, and IP, with a market value of $22 billion, remains his top large-cap pick.

Demand for containerboard, the material used to make brown corrugated boxes, is strong and supplies tight. Those conditions have prompted an industrywide price hike of $50 a ton that could add more than $1 a share to IP's bottom line, according to analyst Philip Ng at Jefferies. Based on that, the company's ability to return cash to investors and an 11% free-cash-flow yield, Ng rates the stock Buy and sees it hitting $60 in the next 12 months, a 29% gain from Friday's $46.41.

Last week, IP said that it is exploring the spin-off and merger of its non-core packaging and paper-supply distribution business, xpedx. Under the plan, xpedx would be divested into a new company, and IP would get a yet-undetermined cash dividend, financed by debt from that entity. The new company would then be spun off to IP shareholders and merged with Bain Capital's Unisource Worldwide in a tax-free transaction.

IP reduced debt by $2 billion in 2012, raised its dividend 14%, and sees "more runway on the dividend" ahead. While increasing the payout is a priority, the company has also said that it will consider share buybacks.